Daniels – who is widely blamed for steering Lloyds to the brink of collapse in 2008 – said up to half of claims on payment protection insurance policies were ‘completely illegitimate’.

In a rare public appearance since retiring from the bailed-out bank almost two years ago, the American told the banking commission of MPs and peers he was ‘deeply regretful’ about customers who were genuine victims of mis-selling, but blamed dishonest claimants for pushing up the compensation bill.

And he offered no apology for the debacle, claiming PPI was ‘good value for money’. He said: ‘In the great majority of cases customers received a good sales process, and received a product that suited them.’

And echoing the notorious boast from Goldman Sachs boss Lloyd Blankfein that bankers do ‘God’s work’, Daniels insisted Lloyds ‘was on the side of the angels’ and abided by the City watchdog’s rules.

Daniels’ version of events was dismissed last night by the Financial Ombudsman, which pointed out that almost three-quarters of PPI complaints it receives about Lloyds TSB are upheld in the customer’s favour.

The ombudsman said last October that bankers’ complaints about bogus claims should be treated with ‘cynicism’.

Lloyds has set aside £5.3billion so far to pay compensation to those who were mis-sold PPI – far more than any other bank – and is expected to earmark even more money for payouts when it announces its latest financial results on March 1.

By the book: The American insisted Lloyds ¿was on the side of the angels¿ and abided by the City watchdog¿s rules

More than £13billion in total has been set aside by the country’s lenders.

Yet banks are still refusing to settle thousands of customers’ PPI disputes – and as a result, subsequent complaints to the banking watchdog have soared to unprecedented levels.